Stock Charted
Glossary

Inventory

Inventory is the goods a business holds for sale to customers or for use in producing those goods, recorded as a current asset on its balance sheet.

What Is Inventory?

Inventory is the stock of items a company owns and intends to sell, or uses to make products it will sell. For a retailer, it is mostly merchandise bought ready for resale. For a manufacturer, it usually falls into three groups: raw materials waiting to be used, work-in-process partly built into products, and finished goods ready to ship. Supplies consumed in operations, such as packaging, may also be counted. Because inventory is expected to turn into cash or revenue within a year, it is normally listed as a current asset on the balance sheet.

How Inventory Is Valued

When goods are sold, their cost moves from the balance sheet to cost of goods sold on the income statement. Companies must choose a method for assigning costs to units. Common approaches include first-in, first-out (FIFO), which assumes the oldest items are sold first; last-in, first-out (LIFO), which assumes the newest items are sold first and is not permitted under International Financial Reporting Standards; and weighted average cost, which spreads the cost of all units evenly. Inventory is generally carried at the lower of cost or net realizable value, so a drop in market value is recorded when it happens rather than later.

Why Inventory Matters to Investors

Inventory affects several parts of a company's financial picture. Because it ties up cash, a rise in inventory can mean a business is spending money on goods it has not yet sold. Holding stock also carries costs such as storage, insurance, spoilage, and obsolescence. If inventory grows faster than sales, it may signal weak demand, and the company could later need to discount goods or write them off. Analysts often compare cost of goods sold with average inventory to calculate inventory turnover, a measure of how quickly stock is sold:

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

Comparing turnover across periods, or against competitors in the same industry, can reveal trends that are not obvious from revenue alone.

Updated October 16, 2026. For general education only; not financial, tax or legal advice.

Browse the Glossary

Related Terms

Current Assets

Current assets are a company's cash and other assets that are expected to be converted into cash, sold, or used up within one year or within its normal operating cycle, whichever is longer.

Balance Sheet

A balance sheet is a financial statement that lists a company's assets, liabilities, and shareholders' equity at a specific point in time, showing what it owns and owes.

Cost of Goods Sold (COGS)

Cost of goods sold is the total direct cost a company incurs to produce or purchase the goods it sold during a period, such as materials, labor, and manufacturing overhead.

Income Statement

An income statement is a financial report that summarizes a company's revenues, expenses, and resulting profit or loss over a specific period, such as a quarter or year.

Inventory Turnover

Inventory turnover measures how many times a company sells and replaces its inventory over a period, indicating how efficiently it converts stock into sales.

First In, First Out (FIFO)

First In, First Out (FIFO) is an accounting and inventory method that assumes the oldest units bought or produced are the first ones sold or used, which affects reported cost and profit.

Working Capital (NWC)

Working capital is a company's current assets minus its current liabilities, a measure of the short-term resources available to cover its near-term obligations.